Foreign firms liable to fringe benefit tax

The fringe benefit tax was introduced by the Finance Act, 2005, by way of an additional income-tax (referred to as FBT) on fringe benefits provided by an employer to its employees. The CBDT, vide a circular, has clarified that foreign companies are also liable to pay FBT in India, if they have employees based here.

On whether FBT is chargeable from an entity even if its income is exempt under a double taxation avoidance agreement (DTAA), the CBDT has clarified that an exemption under a DTAA is only in respect of income of the entity. However, FBT is a liability of an entity qua employer. Therefore, FBT is payable by a non-resident employer if it fulfills the conditions relating to its chargeability laid down in Chapter-XII-H of the Income-Tax Act.

On a question whether FBT is payable by a foreign company even if its employee(s) are not taxable in India, the CBDT has explained that if a foreign company has employees based in India and the remuneration received by all its employees is not taxable in India, such a foreign company will not be liable to pay FBT in India.

On whether FBT is payable by foreign companies deputing personnel to India for a short duration, the board has clarified that a foreign company will be liable to FBT if the salary of its employees is liable to income tax in India.

A reading of the above circular clarifies that FBT is payable by foreign companies in India even if their income is exempt from tax under a double taxation avoidance agreement. However, FBT will not apply if the employees of the foreign companies are not liable to tax in India in terms of the tax treaty.

In a recent case of Population Council Inc, 286 ITR 243 (AAR), the Authority for Advance Ruling has approved the stand taken by the CBDT that the FBT is independent of the tax liability of the employer. The authority held that "sub-section (1) of Section 115WA of the Act mandates that the FBT shall be charged for every assessment year in addition to the income tax charged under this Act. It also held that sub-section (2) thereof clarifies that even when no income tax is payable by an employer on his total income computed in accordance with the provisions of this Act, the "tax on fringe benefits shall be payable by such employer."

It is felt that applicability of FBT on foreign companies even if they are not liable to tax in India, as interpreted by the CBDT and confirmed by Authority for Advance Ruling, is far from reasonable. How could one justify that even if a foreign company is exempt from paying any tax in India, it will nevertheless be liable to pay FBT, which it also a part of income-tax.

It appears that while introducing FBT, the government did not seriously consider the foreign enterprises angle. This is clear from the fact that none of the tax treaties entered into by India even subsequent to introduction of FBT have any reference to the tax. The government will therefore be well advised to insert an explanation in the chapter dealing with FBT to the effect that it is also "income-tax," which will be eligible for relief from double taxation under tax treaties. This will remove the undue hardship being caused to foreign companies without any adverse impact on Indian exchequer.

H.P. Agrawal agar@bol.net.in